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GLOBAL EXPORT FORECAST
Global Export
Forecast – January Chart 1: Canadian exports leveled off in final months of 2006
2007 (seasonally adjusted merchandise exports, billions $Cdn)
41
40 Exports ($ value)
EDC Economics’ Fall 2006 39 Export Volumes (net of prices)
Global Export Forecast (GEF) 38
called for a rise of 3% in 37
billions $Cdn
Canadian exports during 2006, 36
followed by an increase of 1% in
1 35
2007. With 2006 now behind,
34
we have a better sense of where
33
the world economy is heading,
32
and in particular, how recent
31
developments across Canada’s
30
key export sectors are unfolding.
29
Exports of goods and services
Nov- May- Nov- May- Nov- May- Nov- May- Nov- May- Nov- May- Nov-
are estimated to have increased 00 01 01 02 02 03 03 04 04 05 05 06 06
by 2% in 2006, down from the 3%
we earlier envisaged. The
outlook for 2007 remains unchanged
with overall exports forecast to shrink Table 1: Canadian Export Growth – Updated Forecast (annual % growth)
by 1%. However, there are some Modest upward revision to export forecast due to stronger pricing
notable revisions within individual January 2007
industry sectors. For 2007, we now Fall 2006 Forecast
Update
expect a better export performance 2006 2007 2006 2007
for agri-food, industrial metals, high-
tech goods and communications Total goods exports 3 -2 2 -1
equipment. Export volumes (where Goods Volumes 1.5 1.0 2.5 1.5
price effects are netted out) are also Goods Prices 1.5 -3.0 -0.5 -2.0
expected to come in a little stronger in Total service exports 2 1 1 -1
2007. On the downside, the export Total goods and services 3 -1 2 -1
outlook for energy, chemicals, Memorandum
fertilizers, forestry, aircraft and Total goods (excl. energy) 1 -2 2 -1
services have deteriorated. Total goods (excl. autos &
3 0 5 1
energy)
Source: EDC Economics. The Fall 2006 forecast was completed in early September, 2006. The January
EDC’s latest Trade Confidence update was compiled during the second week of January 2006.
Survey (conducted in November
2006) shows a modest rise in
confidence among Canadian exporters – an outcome that is mostly in line with our forecast of exports
2
holding relatively steady in 2007. In particular, the new TCI results show relatively higher confidence
among high-tech and communications equipment – two industries where the export outlook has also
improved a little. Extractive industries (mining, oil and gas) had relatively lower TCI scores, which
matches our outlook for lower export sales in these sectors during 2007. The most cautious
respondents to the TCI survey were among the forestry sector (pulp, paper, lumber, building
products) – another area where we downgraded the export outlook for 2007.
There was also a rise in the percentage of respondents to the TCI survey expecting global economic
conditions to deteriorate in the next six months – a finding which corresponds to EDC Economics’
1
The Fall 2006 Global Export Forecast was completed early September, 2006. All dollar values in this report
refer to Canadian dollars unless otherwise specified.
2
A copy of the detailed Survey results can be found at edc.ca/economics.
EDC Economics – January 2007 1
Economic Analysis and Forecasting
GLOBAL EXPORT FORECAST
forecast for global growth to slow to 4.3% in 2007 compared with 5.1% in 2006. Twenty-eight percent
of Canadian exporters expect global economic conditions to deteriorate in the next six months, the
highest reading since the Fall 2001 survey (just after 9/11).
Outlook for the Canadian Dollar
Our outlook for the Canadian dollar has not changed appreciably since the Fall Forecast. We
maintain the loonie will ease back further through the next 12 months – in line with the expected
easing in global growth and commodity prices (including oil). EDC Economics’ model of the
Canadian dollar shows that oil prices, non-energy commodity prices and the short-term interest rate
differential vis-à-vis the United States are the main determinants of movements in the C$ exchange
rate. In fact, recent movements have brought to light the strong relationship between the Canadian
dollar and oil prices – so much so, that the loonie is now commonly referred to as a “petrocurrency.”
Given our outlook for an easing in oil and commodity prices, we believe the loonie will slip back to
around 83-84 cents US by end-2007. Indeed, compared with the Spring 2006 survey, fewer TCI
respondents now expect the Canadian dollar will increase in the next six months while a larger share
actually believe the dollar will decline further. In the Spring 2006 survey, 63% of respondents
believed the loonie would rise – an accurate reading to be sure. But the latest survey shows only
23% of respondents expect the dollar to rise in the first half of 2007.
While EDC Economics also anticipates further easing in the Canadian dollar through the end of 2007,
spikes back to around 90 cents US, or possibly higher, cannot be ruled out. But such movements are
likely to prove temporary. A shift into the low 90’s would probably be met by action from the Bank of
Canada, namely a reduction in the Bank’s key policy rate. Such a move would introduce significant
downward pressure on the Canadian dollar. Moreover, the global conditions that would push the
Canadian dollar back to 90 cents US would almost certainly include significantly higher oil and
commodity prices – again, a situation that would prove transitory given that much higher prices for oil
and other key commodities (e.g. industrial metals) would have a dampening effect on world economic
growth. Slower growth would bring about lower oil and commodity prices, subsequently allowing the
dollar to ease back as well.
Monetary Policy Developments
Canadian longer-term bond yields are expected to remain fairly stable through 2007, but with a
downward bias, especially with inflation expectations remaining well anchored. We expect the Bank
of Canada will reduce its key bank rate by 50 bps in 2007 – a move which would place downward
pressure on longer-term yields. Nevertheless, we would expect longer-term rates to decline by less
than the drop expected for short-term rates.
For the United States, longer-term bond yields should also remain in a fairly narrow trading range
through 2007, although there is a downward bias for such a range as economic growth slows and
inflation remains under control. As the US economy slows, the US Fed is expected to lower the
Federal Funds rate by 50 bps (but probably not before the Spring) which will allow longer-term rates
to also trade lower. We expect the decline in US longer term rates will be less than the shorter-end of
the yield curve.
Industry Export Growth Outlook
Canadian export growth for 2006 came in somewhat lower than we expected back in the Fall.
Exports of goods and services are estimated to have increased by 2% in 2006. Much of the
downward revision for 2006 comes from lower pricing for natural gas and petroleum as volume
shipments have held up. Exports of fertilizers, rail equipment, automotive products and services were
also weaker than originally anticipated in the second half of 2006. On the upside, several key sectors
experienced stronger growth in the latter months of 2006. Robust shipments of advanced technology
EDC Economics – January 2007 2
Economic Analysis and Forecasting
GLOBAL EXPORT FORECAST
and communications
equipment to non-US Table 2: Canadian Export Forecast by Sector
% Share of
markets resulted in Main Sectors
CAD bn
Total Exports
Export Outlook (% growth)
(2005)
significantly higher export (2005) 2005 2006(e) 2007(f)
Agri-food 30.5 6.4 -1.5 6 14
growth for these sectors.
Energy 87.6 18.5 28.0 5 -3
Agri-food and metals also Forestry 43.4 9.2 -5.7 -8 -4
posted a better-than- Chemical & Plastics 34.6 7.3 7.6 3 -2
expected export Fertilizers 4.0 0.8 29.6 -8 8
performance in the second Ores and Metals 42.5 9.0 10.8 26 -3
half of 2006, mostly a results Other Industrial Products 7.3 1.5 -4.4 -10 2
Aircraft and Parts 10.2 2.2 2.9 -2 -2
of stronger product prices.
Other Ground Transportation 1.9 0.4 -19.6 4 3
Export sales for aerospace
Telecom Equipment 6.9 1.5 13.7 9 5
products also came in Advanced Technology 14.0 3.0 5.0 3 2
stronger during the second Other Machinery and Equipment 26.2 5.5 3.9 4 4
half, although overall sales Motor Vehicles and Parts 80.9 17.1 -2.4 -7 -5
are still expected to be down Consumer Goods 10.1 2.1 -8.1 -6 -7
on the year. Total Goods Sector 407.8 86.3 6.0 2 -1
Total Services Sector 65.0 13.7 1.7 1 -1
For 2007, the overall export Total Exports 472.8 100.0 5.4 2 -1
outlook remains intact with Memorandum
exports of goods and Total Volumes 100.0 2.1 2.5 1.5
services projected to fall by Total Goods (excl. energy) 320.3 67.7 1.2 2 -1
1%. However, there have Total Goods (excl. Autos & Energy) 239.4 50.6 2.5 5 1
Source: EDC Economics. 2005 is actual data, while 2006 is an estimate and 2007 is a forecast.
been some notable changes
across several industry
sectors. Exports of energy products are expected to contract by a larger amount due to a slightly
weaker pricing outlook. Likewise, export receipts for chemicals and plastics have been revised down
due to lower prices. In the case of forestry, the export forecast for 2007 has been downgraded due to
weaker pricing and expectations of a more protracted downturn in the US housing market. Service
receipts are projected to turn in a lower performance due to weakness in tourism and several
commercial subsectors. In addition, aircraft and parts are likely to turn in a more subdued
performance in 2007 as the global economy slows.
The 2007 export forecast for a number of sectors has been upgraded however. We now expect a
better performance for metals compared with the Fall 2006 forecast (although overall export sales are
still expected to decline, just by a much smaller amount). Agri-food has also received a significant
upgrade for 2007, largely due to higher crop prices. Both advanced technology and communications
should experience a better 2007 than we previously forecast. Stronger-than-expected exports to key
non-US markets such as Mexico, South America, the Eurozone, Japan and China are behind the
improved outlook for high-tech and telecom.
As outlined in the Fall Forecast, exports to emerging markets will continue to outpace sales to the
industrialized countries. We estimate exports to emerging markets increased by close to 10% in
2006 and should rise a further 5 to 6% in 2007. In contrast, shipments to industrialized markets can
be expected to ease back in 2007 following growth of almost 2% in 2006.
Global Economic Growth Forecast
Our outlook for the global economic environment has undergone a small upgrade since the Fall
Forecast. Globally, growth has been revised upward for 2007 but the underlying trends we identified
a few months ago continue to unfold as expected. More importantly, the global slowing we expect for
2007 remains intact. We now expect the world economy will expand by 4.3% in 2007 compared with
4% in the Fall Forecast. Growth in 2006 is estimated to have been just over 5%.
Most of the upgrade for 2007 (from the Fall) stems from a better performance in Western Europe as
EDC Economics – January 2007 3
Economic Analysis and Forecasting
GLOBAL EXPORT FORECAST
well as slightly stronger growth in China and India. Several other regions are also expected to put in
a slightly better performance, including Central-Eastern Europe, South America, Africa, the Middle
East and the Asian NIEs (Hong Kong, South Korea, Taiwan, and Singapore). Despite these small
upward revisions, the overall outlook for slower economic growth across most the world’s economies
remains in place. The only significant downgrades from our Fall outlook apply to Japan and Canada.
Smaller downward revisions have been imposed on Brazil and the ASEAN-4 (Indonesia, Malaysia,
Philippines, and Thailand).
Rotational Resiliency not Likely to
Materialize Table 3: Global GDP Forecast by Country (Growth)
% Share of Global Outlook ( growth)
A number of analysts have argued that Top Markets
World
Economy 2005 2006(e) 2007(f)
stronger growth in Europe and Japan, along (2005)
with sustained momentum in Asia, will offset NAFTA 23.7 3.2 3.4 2.2
any downturn in the US economy during US 20.1 3.2 3.3 2.2
2007, which will prevent any slowing in the Canada 1.8 2.9 2.7 2.2
broader global economy. EDC Economics Mexico 1.8 3.0 4.8 3.0
believes this “rotational resiliency” is not likely Western Europe 19.3 1.6 2.5 1.9
to materialize for several reasons. Perhaps United Kingdom 3.0 1.9 2.6 2.3
most important is the magnitude of growth Eurozone 14.8 1.4 2.4 1.8
that would be required from Japan and the Other Western Europe 1.5 2.6 3.2 2.5
Eurozone to fully counter the slower US Japan 6.4 2.6 2.7 1.7
economy. We expect the US economy will Australia & New Zealand 1.2 2.6 2.7 2.5
Asia & Pacific Total 30.3 8.5 8.5 7.6
slow to growth of 2.2% in 2007, down from
China 15.4 10.2 10.5 9.3
3.3% in 2006. To keep global growth on an
India 5.9 8.5 8.5 7.5
even keel, Japan and the Eurozone would
Asian NIEs 3.2 4.5 4.8 4.3
each need to post an expansion of around
ASEAN-4 3.6 5.2 5.2 4.9
3.5% – a highly unlikely outcome given that
Other East Asia & Pacific 0.7 9.4 5.9 5.5
both regions are already showing signs of
Other South Asia 1.4 6.7 5.9 5.7
moderation. In addition, potential growth in
Cent. Asia and East Europe 4.5 5.6 6.2 5.5
the Eurozone is around 2%, and to avoid Russia 2.6 6.4 6.5 5.5
inflationary overheating the European Central South America 5.1 4.7 4.9 4.6
Bank would certainly not allow the economy Argentina 0.9 9.2 8.4 6.9
expand much beyond this 2% rate. Likewise, Brazil 2.6 2.3 3.0 3.5
potential growth in Japan is estimated at Central America 0.5 5.7 4.6 4.1
around 1.5% and anything beyond 2-2.25% Middle East & North Africa 3.8 5.5 5.7 5.2
during 2007 is unlikely. Sub-Sahara Africa 2.6 5.2 4.5 5.4
Total Global Economy 100.0 4.9 5.1 4.3
Moreover, the high degree of integration Source: EDC Economics. 2005 is actual data while 2006 and 2007 are forecast. Asian
Newly Industrialized Economies (NIE) are Hong Kong, Singapore, South Korea and
across the global economy suggests the US Taiwan. ASEAN-4 are Malaysia, Thailand, Indonesia and Philippines.
downturn will spread around the world.
3
Global trade is now equivalent to almost 60% of world GDP, up from 23% in 1970. In the case of
East Asia, intra-regional trade accounts for a significant share of overall trade flows in the region. But
most of the region’s trade is comprised of parts and components for incorporation into finished goods
that are then shipped outside the region. A recent study by the World Bank shows that once these
intermediate components are accounted for, 86% of Asia’s exports are ultimately destined for
4
markets elsewhere. Exports to the US represent 29% of this amount, Europe another 25% and
Japan about 16% – three key markets expected to post slower growth in 2007, and this will filter back
into a loss of momentum in the export-oriented East Asian economies.
3
Calculated as total global trade in goods and services (exports plus imports) as a share of world GDP (in
nominal terms).
4
The World Bank. East Asia Update: Managing Through a Global Downturn. November 2006.
EDC Economics – January 2007 4
Economic Analysis and Forecasting
GLOBAL EXPORT FORECAST
Mechanical and Dynamic Impacts of the Stronger Canadian Dollar
The appreciation of the Canadian dollar affects Canada’s exports in two ways. The first is
mechanical. Approximately 70% of Canada’s exports are priced in US dollars. Canadian companies
receiving US dollar revenues for their exports will now receive fewer Canadian dollars when
converted at the higher exchange rate. So even if there is no change in physical volume shipments,
the higher dollar automatically translates into lower exports in CAD terms.
The second impact involves a more dynamic process whereby Canada’s export sales in physical
volume terms are affected by the stronger CAD. For those Canadian exports that are priced in CAD,
the higher dollar makes these exports more expensive in foreign markets, which puts downward
pressure on export sales – customers in foreign countries tend to substitute into cheaper goods and
services from third-country competitors. The impact here shows up in the physical volume of
Canadian export sales. However, some Canadian companies may choose to accept lower prices in
order to keep their export volumes from falling; that is, companies may attempt to maintain market
share at the expense of lower profit margins.
Industrial Sector Outlook5
Export Growth: Volumes and Prices
When forecasting the value of Canadian exports, two components have to be considered: volume
and price. Volumes refer to the actual physical quantity of the good being shipped while price is the
unit dollar amount paid for those goods. The dollar value of the export is thus simply the volume
multiplied by the price. For example, if volume growth is forecast at 5% while prices are projected to
rise by 7%, the overall increase in value is approximately 12%. Given the large relative changes in
prices and volumes often seen for some goods, it is important to break down the contribution of each
component to the overall growth in export value. This differentiation becomes particularly useful in
the case of commodities and computer equipment, where prices can be particularly volatile.
Energy – EDC economics expects energy exports will fall by 3% in 2007 after rising an estimated 5%
in 2006. Our estimate of 2006 energy exports has been revised down significantly on lower natural
gas export receipts. There is downside risk to our gas price forecast if the trend of unseasonably
warm weather continues through the winter heating season.
The price of crude oil and other petroleum products has seen considerable volatility. After spiking
at nearly US$80/barrel last summer, the price of WTI crude has come crashing down on higher
inventories, the failure of OPEC members to fully implement production cuts, slower economic growth
and unseasonably warm weather. Our outlook for global growth shows a deceleration in 2007 that
will permit further inventory accumulation, alongside already higher global spare production capacity
(estimated at 2.4 million barrels/day). This creates a more comfortable buffer against geopolitical
risks reducing the probability of a recurrence of the relatively large risk premium observed in energy
markets over the past summer. After recording an average annual price of US$66/barrel in 2006,
EDC expects the price of crude to average US$55/barrel in 2007. While we anticipate a slight rise in
Canadian export volumes – from both offshore and onshore production – the gain will not offset a
double-digit price decline resulting in a 4% drop in related export receipts in 2007. This follows the
23% gain expected for 2006.
5
All export values (and corresponding growth rates) in this report refer to domestic exports on a customs basis.
The exception is service exports which are on a balance of payments basis.
EDC Economics – January 2007 5
Economic Analysis and Forecasting
GLOBAL EXPORT FORECAST
Natural gas prices have been on a rollercoaster ride. Last year, prices hit a mid-year high of over
US$8.5/Mbtu in August, fell to below $4 in September, rose again above $8.5 in November and
ended the year near $5.5. Swinging temperatures in the US Northeast were largely responsible for
these radical moves. The resulting volatility has made natural gas storage an increasingly valuable
commodity in its own right. For 2007, we believe natural gas prices will show a slight decline on
warmer weather, slower US growth and sufficient North American supply. Canadian production will
increasingly come from non-traditional sources such as coal-bed methane as production from the
Western Canadian Sedimentary Basin shows some decline. Indeed, gas from this alternative source
will permit a slight rise in domestic production this year. The increase however is not expected to
permit much change in export volumes, which when considered alongside our price outlook leaves
gas export receipts relatively unchanged in 2007. Although representing a small share of Canada’s
exports, if other production problems are rectified, natural gas from Nova Scotia’s Sable Island project
could get a boost in 2007 with the addition of a new compression facility.
With much of Canada’s coal exports being metallurgical coal, its price will be linked to the global steel
market. While global steel production will again rise in 2007, it will be at a decelerated rate and we
anticipate a healthy expansion in the global supply of metallurgical coal. The product of this outlook
is a 12% price decline this year. EDC expects modest volume increases to provide some, albeit
limited, offset to the price drop. The dollar value of coal exports were up some 5% in 2006 but lower
prices should induce an 8% retreat in 2007.
Metal ores and metals – Canadian businesses can expect further volatility among most base metals
through the next 12 to 18 months. Across most industrial metals, tight supply conditions continue to
support prices. However, slower global activity is expected to test current levels. Already, copper
prices have retreated in response to the housing related slowdown in the United States.
Furthermore, additional smelter and refinery production will add to metal stockpiles later this year and
more substantially next year. Metal prices are highly vulnerable to an outflow of speculative capital,
with the key consideration the flow of investment funds into or out of metals. If, as we expect there is
flight, a precipitous drop in prices will occur, albeit to levels still firmly above historic norms. As such,
our forecast calls for metal prices to decline somewhat in 2007. Our revised growth forecast for
metals and ores in 2006 now calls for export growth of 26% (vs. 20% in the Fall Outlook), before
lower prices induce a fall in export earnings of around 3% in 2007 (to a still respectable estimated
C$51.8 billion in export receipts).
The market for copper has softened over the last few months, with declining prices caused by rising
global inventories, housing-related slowdown in the United States, and possibly less speculative
positioning by hedge funds. EDC economics estimates global copper inventories are up almost 44%
compared to September last year.
In contrast, the market for nickel has tightened substantially. Global production of refined nickel has
not risen sufficiently to meet demand from stainless steel producers and other nickel users. The
shortfall in production was partly attributed to several setbacks such as labour union strikes,
processing related problems and weather related disruptions. As a result, the price of nickel has
regularly tested new heights—no doubt prices have been fueled further by stronger speculative
buying among hedge funds.
Iron ore producers have been unable to keep pace with global demand, resulting in rising ore prices.
Asian steel demand and production are expected to remain fairly strong this year, a major factor
supporting the outlook for iron ore prices. Steel prices, however, may soften this year in response to
China (though the downside will be limited by the high level of steel input costs). Traditionally, China
has been a major net importer of steel, reaching a peak of almost 35 million tonnes in 2003.
However, China’s steel production has grown significantly since then and now exceeds domestic
demand of close to 370 million tones.
For zinc, the key word is deficit, that is, global supply deficit. Global tradable zinc inventories have
fallen by 42% since September last year, with the level now in ‘critical’ territory. Furthermore, the
EDC Economics – January 2007 6
Economic Analysis and Forecasting
GLOBAL EXPORT FORECAST
supply situation is not expected to improve substantially over the near term, as new production is not
expected by markets until 2008. As a result, zinc prices increased sharply last year, with peaks in
May, October and November.
Rising stocks and easing prices of metallurgical alumina have taken pressure off aluminum
smelters, allowing some operations to re-start production. In particular, Chinese aluminum production
increased substantially last year and is not expected to slowdown this year. As such, over capacity is
a concern relative to Chinese demand, and thus China’s net export position in the coming years, and
its impact on global prices, is a key consideration.
Forestry – The poor performance of wood products and of the paper sectors culminated in an
estimated 8% decline in forestry exports during 2006. This decline is similar to our Fall 2006
forecast, although better than anticipated results in the pulp sector did offset an even weaker result in
wood products. The export outlook for 2007 has been revised down slightly to a drop of 3%, as we
now expect a more protracted US housing downturn. The pulp and paper outlook however, will
benefit from a slightly weaker Canadian dollar, although overseas competition will continue to
increase.
With the downturn in the US housing sector having seemingly hit the bottom of the cycle, the only
question that remains unanswered is how long will it remain there. As a result of weaker demand and
prices, export earnings for lumber and wood products declined 12% y/y in Jan-Oct, 2006. Faced
with deteriorating fundamentals, shutdowns and curtailments were undertaken to reestablish some
balance in the market. The shutdown list became a lengthier one especially toward the end of 2006,
with Weyerhaeuser, Domtar, Tembec, Abitibi-Consolidated, Fraser Papers, Krueger, and Bowater all
announcing downtime. With the Canada-US softwood lumber dispute now resolved, Canadian
lumber companies, except those from Atlantic Canada, will either have limited access to the US
market or face an export tax, as specified under the terms of the agreement. While prices have
deteriorated substantially, export volumes have fallen but not collapsed. Indeed, production in British
Columbia continues to outpace the level of 2005, as efforts to combat the mountain pine beetle
infestation remain in place. With the US housing downturn expected to last through much of 2007,
lumber exports are likely to decline further in 2007.
Higher US pulp prices, the reopening of previously closed mills and greater demand from Asian
markets resulted in greater exports in both value and volume. For the first 10 months of 2006, export
earnings were up 2%, with shipments to China (+38%), Indonesia (+34%), Taiwan (+48%), Japan
(+11%), and South Korea (+10%) all up significantly on a year-over-year basis. Greater demand from
Asia has been sufficient to offset weaker demand from the US and Europe, while tight global supplies
have allowed companies to push through important price increases. New Chinese paper machines
are absorbing much of the extra slack left by waning North American demand. But a slowing global
economy will begin to take its toll on demand heading into 2007. In addition, a steady flow of pulp out
of lower cost centers in South America will continue to feed downward pricing pressures. With the
global slowdown expected this year and growing supplies from emerging markets, Canadian export
growth should moderate in 2007 but remain positive thanks to greater demand from Asia and the
weaker Canadian dollar.
After a strong run of price increases in 2006, it now appears that newsprint prices are heading down,
having decreased US$16 for 30lb rolls since peaking in June. The demand fundamentals in the US
market are bearish, with consumption from US dailies continuing to evaporate, declining 7.9% y/y in
the first ten months of 2006, while spending on newspaper print advertising has declined in the past
two quarters. While demand is growing in Asia, growing capacity in the region has limited Canadian
export demand, with Canadian companies turning instead to Latin America, where export earnings
increased 21% y/y during the January-October 2006 period. In 2007, the weaker Canadian dollar will
provide only a limited measure of relief to exporters, as producers will continue to loose pricing power
with plummeting US demand and rapidly rising Chinese capacity coming online and courting major
US publishers. Greater competition for a shrinking market and continuously improving conservation
methods among the dailies raise serious structural questions going forward.
EDC Economics – January 2007 7
Economic Analysis and Forecasting
GLOBAL EXPORT FORECAST
Aerospace products – Canadian manufacturers of aerospace products saw exports decline by 1.7%
in the first ten months of 2006 despite strong industry fundamentals. A slump in regional jet sales
was the major drag on overall exports, as other industry sub-segments saw shipments and orders
increase. Regional jet deliveries in the first three quarters of 2006 were down 50% relative to the
same period in 2005 (58 versus 105); in contrast to turboprop deliveries (Q-series) that were up 50%
(34 versus 22) relative to the same period last year. Bombardier is rebalancing production for 2007
by reducing jet production to one per every 5 days (from 3 previously) while augmenting turboprop as
a result of strong orders. Overall export revenues are still lower owing to the higher purchase price
for jets compared to turboprops. The rest of the aerospace industry is benefiting from extremely
strong deliveries and orders: industry-wide corporate jet deliveries reached the milestone of 1,000
deliveries worldwide. Total jet deliveries in the first three quarters of 2006 totaled 774 units, versus
698 in the same period last year. Airbus, Boeing, and Embraer deliveries and order-books are up
substantially, presaging continuing strong shipments from Canadian aerospace parts suppliers.
Indeed, Boeing’s President and CEO stated that a year similar to 2006 would not be repeated in his
lifetime. Furthermore, large and small Canadian suppliers tied to defense spending have benefited
from continuing large orders. As a result, we estimate the sector’s export decline was just under 2%
through 2006, while a similar 2% drop is expected for 2007.
Motor vehicles and parts – Exports of motor vehicle and parts were down 6.2% year-to-date
through October 2006, reflecting the impact of the slowing US economy. The year-to-date results are
in line with the Fall GEF forecast of a 5% decline in 2006. The factors that underpinned our Fall 2006
position still hold. As such, our earlier call has been revised only slightly to a 7% drop in automotive
exports for 2006, while for 2007, exports are forecast to recede a further 5%. Factors driving this
forecast include the continued erosion of Big Three market share (which still constitute the bulk of
Canadian auto production and exports), an anticipated capacity reduction at Chrysler operations in
Ontario later this year and a slowing US economy. As a result of some of these adverse
fundamentals, US car sales are expected to drop from an estimated 16.5 million units in 2006 to
below 16.0 million units in 2007 – the lowest level since 1998. Canadian exports of automotive parts
were down 9.1% y/y in the first 10 months of 2006 and are forecast to decline a further 5% in 2007.
Rail and other transportation equipment (excluding autos and trucks) – The rail and other
transportation equipment sector consists of rail transport equipment, ship/boat building and repair,
motorcycles, bicycles and armoured military vehicles. We have taken our 2006 export growth
forecast for this sector down to 4%, a significant moderation of our 12% Fall forecast. The outlook for
2007 remains intact, at 3%. Most of the downgrade comes from weaker-than-anticipated export
shipments of railcars and related rail equipment in Q3 2006, down 25% y/y, after surging more
than 30% y/y in the first half of the year. We now expect full-year growth of only around 10% in that
segment. Record commodity prices and a flurry of shipping activity encouraged new investment in
US rail capacity, boosting freight car orders 105% y/y in Q1. But concerns over a sharp US
slowdown triggered a 5% drop in orders in Q2. Nevertheless, Q3 orders jumped back up 23%, with
the backlog for US railcar orders back up in record territory at 88,116 units (Railway Supply Institute).
This should generate solid demand for Canadian suppliers through year-end. Despite the continued
push by U.S. transportation companies to upgrade their networks and replace an aging railcar fleet,
export gains are projected to weaken slightly in 2007, in line with a general slowdown in the US
economy.
Exports of other transportation equipment are likewise expected to come in below our Fall growth
forecast of 5%, at closer to 1% for 2006. Export receipts earned from ship/boat building and repair
will show only marginal gains for the full year, with weakness expected across most geographic
markets through 2007 as well. Despite some new pockets of activity, the global slowdown should
ease capacity shortage, translating into weaker demand for Canadian exports. While exports of all
other transportation equipment – comprised mostly of recreational vehicles and armoured vehicles
– saw remarkable growth in H1 2006, they pulled back sharply in Q3. As military vehicle sales to Iraq
drop off and other military contracts to the Middle East (specifically, Saudi Arabia) expire, we expect
Canadian exporters to face softer demand going forward. Furthermore, US demand for military and
EDC Economics – January 2007 8
Economic Analysis and Forecasting
GLOBAL EXPORT FORECAST
recreational vehicles should ease back, reflecting a retrenchment in US consumer spending and
efforts to rein in a runaway military budget.
Telecom equipment – Canadian exports of telecom equipment came in much stronger than
expected in the final months of 2006. We now estimate telecom exports were up by 9% in 2006,
compared with expectations of 4% growth in the Fall forecast. Most of the strength comes from
higher volume shipments to non-US markets, namely the Eurozone, Mexico, South America and
China. Canadian companies have been successful in increasing their sales into these key overseas
markets. Indeed, all of these markets posted gains of 20 to 30% during 2006 while sales to the US
remained fairly flat. For 2007, we export overall receipts to rise by a more modest 5%, which still
represents an upgrade from our previous forecast. As in 2006, sales of telecom equipment to non-
US markets should continue to outpace shipments to the US through the coming year.
Advanced technology equipment – Prospects for exports of high-tech equipment have also
improved since our last forecast. Canadian exports of advanced tech equipment grew an estimated
3% in 2006 (compared with a projected decline of 2% in the Fall GEF). Better-than-expected export
sales in the final few months of 2006 account for the stronger performance. Higher shipments to non-
US markets such as the Eurozone, Mexico, South America, Japan and China account for much of the
improvement (as is the case with telecom equipment). Overall, we also expect a slightly better
performance in 2007 with export sales forecast to rise by 2%, compared with a 1% gain in the
previous outlook. Exports of Canadian high-tech equipment to non-US markets are expected to
outperform the US through the next 12 months or so.
Industrial machinery and equipment – Our overall export outlook for machinery and equipment
(M&E) remains largely intact from the Fall forecast with some variation within the subcomponents. In
the Fall 2006 GEF, we called for M&E exports to rise by 3.5% in 2006 and 4% in 2007. We now
expect slightly stronger growth of 4% in 2006 while our projection for 2007 holds at 4%.
Agricultural machinery equipment exports declined in 2006 following strong double-digit gains in
both 2004 and 2005. In 2007, stronger crop prices and a weaker Canadian dollar should provide a lift
to exports. Exports of mining and oil and gas machinery rose by 7% in the past year on a mix of
price and volume increases. Although commodity prices are off of their cyclical peaks investment in
energy and minerals will remain strong over the medium term as will demand for related capital.
Rubber and plastics machinery and equipment exports were down an estimated 2% in 2006 and
are unlikely to see much growth in 2007. Finished product prices in the chemicals and plastics
industries are likely to stabilize or weaken in 2007 and this could slow investment. Demand from
developed economies is unlikely to show any growth but the story for emerging markets is quite
optimistic as these countries continue to develop their downstream energy industries.
Other machinery and equipment exports increased by approximately 4% in 2006. There are
pockets of significant strength within this broad category including commercial services and HVAC
machinery; however, this has been largely offset by a 10% drop in prices for office equipment. For
2007, we expect other machinery to rise 1.5% on modest price and volume growth. Metal and
woodworking machinery experienced a 2% drop in exports during 2006. The lion’s share of
receipts in this category come from metal-working equipment – which normally sees over 80% of
exports head to the US. Slower activity in the US economy means this sub-sector is expected to
record only a slight increase in exports during 2007.
Agri-food – With the rapid increase in crop prices at the end of 2006, exports of Canadian agri-food
products are on pace to exceed our Fall forecast of 4%. We now anticipate that growth in 2006 was
closer to 6%. Growth for 2007 has also been revised up, to 14%, as prices for wheat and canola
grow rapidly, while the expansion of biofuels, mainly ethanol, will fuel greater demand for grains and
cereals. Growth will be somewhat dampened by the slowdown in consumer demand in the US, for
prepared food products, and the weaker prices for cattle and hogs.
Wheat prices increased sharply in the second half of 2006, as severe droughts in Australia, the
world’s second largest wheat exporter, and weaker output from Eastern Europe, Russia and the US
EDC Economics – January 2007 9
Economic Analysis and Forecasting
GLOBAL EXPORT FORECAST
reduced available supplies and drove down global inventories. The US Department of Agriculture
anticipates that global wheat inventories will hit their lowest levels since 1982 in May 2007. Higher
prices were also driven by greater demand from India, which dropped import duties to avoid domestic
shortfalls. Canola prices also increased substantially with the drought in Australia, but also from
lower output in Canada, India and China. Prices have also benefited from higher prices for palm oil,
which is a substitute for canola oil in cooking. In 2007, demand for grains and cereals should
continue to be driven by the expansion of the biofuels, mostly ethanol, which has pushed the price of
corn to a 10-year high. Recent damages to palm plantations in Indonesia and Malaysia, the world’s
top two palm oil producers, will also provide some support to stronger canola prices in 2007.
With the resumption in cattle trade with the US, Canadian ranchers have recaptured the $2 billion
annual export sales they had before the ban was imposed in 2003. We expect exports to continue to
grow in 2007, albeit at a much slower pace, as cattle inventories in the US at the end of 2006 were at
their highest levels on record, and owners will be eager to reduce their inventories with the high price
of corn, used extensively in cattle feed. Demand in the US will also be hampered by the limitations
imposed on US exports of beef to Japan and South Korea, although we expect more normal beef
trade to resume at some point during the year. The good news for Canadian ranchers is that the US
has recently announced it would lift some of the remaining restrictions on Canadian cattle exports to
the US.
Also constraining the growth of the agri-food sector in 2007 is the expected slowdown of the US
economy, which will dampen consumers’ appetite for prepared food products. The limited growth
recorded so far in 2006 (+0.5% Jan-Oct) was due to an important decline in exports of beverages,
which partly offset growth in most other categories.
Chemicals and plastics – The export outlook for the chemicals, and rubber and plastics sector
has been lowered for 2007 with downward revisions to both prices and volumes. Exports for these
two sectors were up by an estimated 3% in 2006, led by an expansion in inorganic chemicals, a story
that is unchanged from our last update. Export growth remains heavily dependent on the US market
and slower economic growth there has begun show up in terms of lower Canadian export volumes.
With both softer US growth and lower feedstock prices (natural gas and crude) there appears little
upside for prices or volumes. As the second half of 2007 approaches we expect demand conditions to
pick up offering some offset to weakness earlier in the year. Export growth for Canadian chemical,
rubber and plastics outside the US market will continue to exceed US demand growth in the coming
year. Canadian capacity constraints will prove problematic in chemicals, with the 84.5% reading for
the third quarter of 2006 running near an all time high. Meanwhile utilization rates for plastics have
fallen from a high of roughly 90% in the fourth quarter of 2005 to only 80% as of the third quarter of
last year. Pharmaceuticals have seen blockbuster 20% growth in 2006 and although the industry is
not highly cyclical, repeating last year’s performance is not likely. For 2007, combined exports of
chemicals, plastics and rubber products should fall by 2%.
Consumer goods – Exports of consumer goods fell 6.5% y/y through January-October of 2006, in
line with our Fall GEF forecast of a 6% decline for all of 2006. Our call for a further 7% decline in
2007 remains in place. A stronger Canadian dollar, China’s increasing market share in the key US
market and persistently high oil prices have all concurred to erode demand for Canadian consumer
goods. In particular, Canadian exports of furniture, textiles and apparel have suffered losses due to
increasing Asian competition in the US and European markets, a trend that is unlikely to disappear
over the coming year.
Services – Exports of services increased marginally by 0.3% over the first three quarters in 2006.
The Fall GEF forecast called for a 2% increase which was premised on a stronger export
performance by the commercial services sector (just + 0.2% year-to-date). Services exports are
forecast to fall by 1% in 2007 which is mirrored by a 1% retraction of commercial services exports in
2007, albeit with variations among individual sub-sectors. A slower US economy is the main
assumption behind the decrease in commercial service exports.
EDC Economics – January 2007 10
Economic Analysis and Forecasting
GLOBAL EXPORT FORECAST
As of January 23, 2007, a new American law will require everyone entering the United States by air to
have a passport. The U.S. Government rule will temporarily affect air transport which is forecast to
fall by 2% in 2007. Water transport, on the other hand, will continue to see double digit growth
based on the continued demand for transportation by Canada’s resource sector. The latter increase
is expected to offset declines in air and land transport, resulting in a 1% increase in total transport
services in 2007.
Travel services will be equally affected by the new American law. While most business travelers are
likely to have the proper documentation, many tourists will not have a passport required to travel to
Canada by air. It is estimated that 29% of US citizens who travel to Canada by air or sea do not have
a U.S. passport. As such, the new requirement will negatively impact travel services which is forecast
to decline by 2% in 2007. An appreciating US dollar will only partially offset the decline in travel
6
services.
6
A more detailed report on Canadian and global trends in services trade will be soon be available on our
website: edc.ca/economics.
EDC Economics – January 2007 11
Economic Analysis and Forecasting
GLOBAL EXPORT FORECAST
Table 4: GDP Outlook by Region (%Growth) – Updated forecast and Revisions from Fall 2006
% Share of Updated Outlook % point revision from Fall
World (% growth) 2006 Forecast
Top Markets Comments
Economy
(2005) 2005 2006(e) 2007(f) 2006(e) 2007(f)
NAFTA 23.7% 3.2 3.4 2.2 +0.1 -- --
United States 20.1% 3.2 3.3 2.2 -- -- -- -- Economy showing signs of slowing as expected.
Solid household and business spending will bolster
domestic demand this year, but weaker U.S. demand
Canada 1.8% 2.9 2.7 2.2 -0.1 -0.2 will limit Canada's export performance resulting in
modest GDP growth for 2007.
Mexico 1.8% 3 4.8 3.0 +0.5 -- --
Western Europe 19.3% 1.6 2.5 1.9 +0.3 +0.3
Robust business investment and government
consumption as well as immigration contributed
United Kingdom 3.0% 1.9 2.6 2.3 +0.1 +0.2 positively to GDP growth in 2006; however, domestic
demand growth is forecast to slow in 2007.
Although investment has been particularly strong,
growth was broadly based in 2006. For 2007,
Eurozone 14.8% 1.4 2.4 1.8 +0.2 +0.4 tightening of fiscal and monetary policy will see the
Eurozone lose some momentum.
Stronger than anticipated private consumption has
bolstered economic growth in non-euro
Other West Europe 1.5% 2.6 3.2 2.5 +1.5 +1.0 Scandinavian countries in 2006. Tighter monetary
policy will aim to slow economic growth in 2007.
Consumer spending under pressure and export
Japan 6.4% 2.6 2.7 1.7 -- -- -0.2 growth expected to moderate.
Australia & New Zealand 1.2% 2.6 2.7 2.5 -- -- -- --
Asia & Pacific total 30.3% 8.5 8.5 7.6 +0.4 +0.3
Economy will slow slightly in 2007 in the face of
slower world growth and domestic efforts to promote
China,P.R.: Mainland 15.4% 10.2 10.5 9.3 +0.5 +0.2 consumption at the expense of growth. Exports and
imports will notch up solid gains alongside
investment and consumer spending.
Tightening by Central Bank, combined with
India 5.9% 8.5 8.5 7.5 -- -- +0.4 slowdown in world economy, should constrain
growth.
Asian NIE's 3.2% 4.5 4.8 4.3 -- -- +0.3
Weaker export demand from the US and the political
ASEAN-4 3.6% 5.2 5.2 5.3 +0.2 -0.1 situation in Thailand will dampen growth in 2007.
Other Asia 0.7% 9.4 5.9 5.8 +0.1 -- --
Other South Asia 1.4% 6.7 5.9 5.5 -- -- -- --
Weaker GDP growth among developed European
countries in 2007 will restrict the growth
Cent. & Eastern Europe 4.5% 5.6 6.2 5.5 +1.1 +0.5 performances of some developing eastern European
countries.
Growth declines slightly in 2007 due to weaker oil
Russia 2.6% 6.4 6.5 5.9 -- -- +0.4 prices.
South America 5.1% 4.7 4.9 4.6 +0.2 +0.5
Stronger than expected government spending.
Argentina 0.9% 9.2 8.4 6.9 +0.9 +1.7
Tight monetary conditions continue to restrict growth.
Brazil 2.6% 2.3 3.0 3.5 -0.5 -0.1
Central America and the
0.5% 5.7 5.8 4.1 +1.2 +0.2
Caribbean
Middle East & North Relatively buoyant oil prices encourage spending
3.8% 5.5 5.7 5.2 -0.1 +0.2
Africa and new investment.
Sub-Saharan Africa 2.6% 5.2 4.5 5.4 -0.8 +0.2
World total 100.0% 4.9 5.1 4.3 +0.3 +0.3
Source: EDC Economic Analysis and Forecasting Team. 2005 actual, 2006 and 2007 are forecast. Asian Newly Industrialized Economies (NIE) are Hong Kong, Singapore, South Korea and Taiwan.
EDC Economics – January 2007 12
Economic Analysis and Forecasting
GLOBAL EXPORT FORECAST
Table 5: Export Outlook by Industry (%Growth)
% Share Updated Outlook %point revision from
CAD bn of (% growth) Fall 2006 Forecast
Sectors Comments
(2005) Exports
(2005) 2005 2006(e) 2007(f) 2006(e) 2007(f)
Improved crop prices will see
Agri-food 30.48 6.4 -1.5 6 14 +2 +9 stronger export growth in
2006-07
2006 down on lower natural
Energy 87.57 18.5 28.0 5 -3 -6 -1
gas prices.
Protracted decline in US
Forestry 43.37 9.2 -5.7 -8 -4 --- -2 housing market result in
weaker growth in 2007
2007 revised down on lower
Chemical and Plastics 34.57 7.3 7.6 3 -2 +1 -5 feedstock prices and peaking
chem/plastics prices.
High crop prices will fuel
Fertilizer 3.99 0.8 29.6 -8 8 -4 ---
demand for fertilizers in 2007
Ores and Metals 42.47 9.0 10.8 26 -3 +6 +4
2006 revised down on exports
Other Industrial
7.29 1.5 -4.4 -10 2 -5.0 +1 failing to meet earlier
Products
expectations.
Exports have been weaker
than expected as a result of
Aircraft and Parts 10.21 2.2 2.9 -2 -2 +2 -3 lower demand for RJ aircraft.
This should continue in 2007
as the economy slows.
After surging in H1 2006,
Rail and Other
exports of railcars and related
Transportation 1.91 0.4 -19.6 4 3 -8 ---
rail equipment plummeted in
Equipment
Q3.
Stronger growth in non-US
Telecom Equipment 6.89 1.5 13.7 9 5 +5 +2
markets.
Stronger growth in non-US
Advanced Technology 13.98 3.0 5.0 3 2 +5 +1
markets.
Industrial Machinery and
26.15 5.5 3.9 4 4 +1 ---
Equipment
Slowdown in US market in
Motor Vehicles and
80.90 17.1 -2.4 -7 -5 -2 +1 2006 followed by a general
Parts
recovery late 2007
Consumer Goods 10.11 2.1 -8.1 -6 -7 --- ---
Total Goods 407.83 86.3 6.0 2 -1 -1 +1
Commercial services sub-
sector underperforms in 2006
Services 64.97 13.7 1.7 1 -1 -1.0 -2
and 2007
Total Exports 472.80 100.0 5.4 2 -1 -1 ---
Total Non-energy
320.26 67.7 1.2 2 -0.5 +1 +1.5
goods
Source: EDC Economics. 2005 actual, 2006 estimate, 2007 forecast.
These Reports are a compilation of publicly available information and are not intended to provide specific advice and should
not be relied on as such. No action or decisions should be taken without independent research and professional advice. While
EDC makes reasonable commercial efforts to ensure that the information contained in the Reports is accurate at the time it is
placed on the site, EDC does not represent or warrant the accurateness, timeliness or completeness of the information
contained in the Reports. EDC is not liable whatsoever for any loss or damage caused by or resulting from any inaccuracies,
errors or omissions in such information.
EDC Economics – January 2007 13
Economic Analysis and Forecasting
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